Assignment 4

NOTE: Be sure to follow the Assignment Instructions posted in the Assignments folder in Blackboard.

Chapter 5

1. Airy Window Units sells air conditioners for $125 per unit, and the variable cost to produce them is $87. The owner estimates that the fixed costs are $4,186,000.

a. Compute the break-even point in units.

b. Use the format from the table below (in dollars) to illustrate the break-even point has been achieved.
Sales...................... ____________
- Fixed costs............. ____________
- Total variable costs... ____________
Net profit (loss).......... ____________

2. The Alfa Pet Carrier Company's income statement for 2015 is as follows: Alfa Pet Carrier Company
Income Statement
For the Year Ended December 31, 2015
Sales (20,000 Pet Carriers at $53 each)......... $1,060,000
Less: Variable costs (20,000 at $23)............. 460,000
Fixed costs................................................. 410,000
Earnings before interest and taxes (EBIT) .... 190,000
Interest expense ............................................. 47,000
Earnings before taxes (EBT)......................... 143,000
Income tax expense (34%) ............................ 48,620
Earnings after taxes (EAT)............................ $ 94,380

Given this income statement, compute the following:

a. Degree of operating leverage.
b. Degree of financial leverage.
c. Degree of combined leverage.
d. Break-even point in units.

Chapter 6

3. Abbigail's Fashions expects sales next year to be $1,300,000 if the economy is strong, $1,100,000 if the economy is steady, and $700,000 if the economy is weak. The CFO believes there is a 20 percent probability the economy will be strong, a 50 percent probability of a steady economy, and

a 30 percent probability of a weak economy. What is the expected level of sales for the next year?

4. Archers, Inc. makes deer stands that are very popular in the fall and winter season. Units sold are anticipated as:
October..................................................... 10,000
November................................................. 20,000
December................................................. 40,000
January ..................................................... 30,000
100,000 units

If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup. However, the company decides to go with level production to smooth out its manufacturing costs. The company will still produce the 100,000 items over four months.
a. Assuming no inventory at the end of September, what is the ending inventory at the end of each month? Compare the units sales to the units produced and keep a running total.

b. If the finished inventory cost is $255 per unit and will be financed at the bank at a cost of 6 percent (annual rate), what is the monthly financing cost and the total for the four months?

Chapter 7
5. In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?

6. What are the 5 C's of credit that are sometimes used by bankers and other creditors to determine whether a loan will be made? Which is the most important and why?

7. Andrews Plumbing Supplies has annual sales of $6,625,000. Eighty percent are on credit. The firm has $ 585,000 in accounts receivable. Compute the value of the average collection period (be sure to read page 63 regarding days in the year for this calculation).

8. Arizona Tires has expected sales of 14,000 tires this year, an ordering cost of $6 per order, and carrying costs of $1.60 per tire.
a. What is the economic ordering quantity?

b. How many orders will be placed during the year?
c. What will the average inventory be?

9. Alaska Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $1,000,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 3 percent of sales, and production and selling costs will be 79 percent of sales. The firm is in the 35 percent tax bracket.

a. Compute the incremental income after taxes.
b. What will the incremental return on sales be if these new credit customers are accepted?

Chapter 8

10. Compute the cost of not taking the following cash discounts.
a. 2/10, net 30.
b. 2/15, net 40.
c. 3/10, net 45.
d. 3/20, net 60.

11. Al's Print Shoppe can borrow from its bank at 8 percent to take a cash discount. The terms of the cash discount are 2/15, net 60. Should the firm borrow the funds?

12. Your bank will lend you $2,000 for 60 days at a cost of $35 interest. What is your effective rate of interest?

13. A1 Pay Day Lenders will lend $200 for 10 days at a cost of $ 10 interest. What is the effective rate of interest?